With interest rates in Australia at record lows, it might be time to refinancing your home loan.
Refinancing is simply the process of paying out your existing loan with a new loan with a different lender (or even the same lender). The ultimate goal is to get a better deal.
What are the benefits?
- Reduced cost – the most obvious reason is that you can save interest on your loan. This is done by simply comparing the interest rate between two loans. There might also be further savings in the form of fees that differ between loans (package fees for example).
- Consolidate debts – if you have multiple loans at varying rates there may be some benefit for refinancing the loan. Note that this is not always the case. If by refinancing you are extending the loan term, you may end up paying more interest.
- New features – perhaps your current loan doesn’t have the features you need such as an offset account or the ability to split the loan between fixed and variable.
- Access Equity – perhaps you want to renovate and need to access some of the equity you’ve built up in your home.
What does refinancing cost?
When you switch home loans you are going to incur a number of fees including:
- Discharge fees – this is a fee charged by the outgoing bank for releasing the loan.
- Registration fees – your state government will charge you fees to register the new loan.
- Application Fees – your new lender will likely have application fees, upfront legal fees, settlement fees and valuation fees.
- Other Fees – generally there are a number of small incidental fees.
- Break costs – if you have a fixed rate home loan, then you will incur a break fee if you exit the loan earlier. This can be a deal-breaker. These fees can be in the thousands of dollars.
Notwithstanding break costs, it generally costs about $700-$1,000 to refinance a home loan. So if the interest and fee savings are greater than the cost (and the potential hassle), then it is worth considering.